Health insurers face little competition

Monopolization of most U.S. markets may be behind rising premiums

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Health insurers are on board with many congressional proposals for health care reform. But they are vociferously opposed to the creation of a publicly financed insurer, arguing that they couldn't possibly compete against a low-cost public plan that has no need to earn profits. They may have a point. Many economists say insurers face very little competition now across large swaths of the U.S.

Various studies have found that health insurance is one of the most concentrated markets in the U.S., and that the lack of competition may be one factor behind sharply rising premiums. Each year, the American Medical Association surveys the competitive landscape for commercial health insurers; the latest report found that out of 314 metropolitan areas across the nation, 94 percent can be defined as highly concentrated, with two companies or even a single provider dominating the market. In 15 states, one insurer has half or more of the entire market, and in seven states, a single insurer has 75 percent or more.

This concentration has become a potent argument for supporters of a public plan, President Obama among them. Such a plan would theoretically lower administration costs. And with no need to generate profits for shareholders, it could offer lower premiums — thus applying precisely the kinds of pressures that are most needed. On July 21, in White House remarks urging action on his health care initiative — something he now does on almost a daily basis — Obama again spoke of the need for a public plan. "Americans will be able to compare the price and quality of different plans, and pick the plan that they want. If you like your current plan, you will be able to keep it," he said. "And each bill provides for a public option that will keep insurance companies honest, ensuring the competition necessary to make coverage affordable."

Industry ad campaign
Insurers argue that such a plan would be a disaster for their industry. They point to an analysis by the Lewin Group, a subsidiary of UnitedHealthcare, that predicts that 103 million Americans would jump to the cheaper public option, out of the 160 million now insured commercially (the Congressional Budget Office estimates that only 9 million to 10 million would choose a public plan by 2019). Karen Ignagni, president of the industry lobbying group America's Health Insurance Plans, or AHIP, said in a letter to Congress that a public plan would "significantly increase costs for those who remain in private coverage."

Insurers believe they are already offering up plenty of other changes to their business practices to help further reform, and should be spared the burden of the public plan. AHIP has come out in favor of ending different premiums based on health status and eliminating coverage denials because of pre-existing conditions. It also supports the creation of a publicly run insurance exchange that would make it easy for consumers to compare policies from different companies, bringing price transparency to an industry that can be frustratingly opaque. "We think comprehensive reform is needed," says Alissa Fox, senior vice president of Blue Cross Blue Shield.

AHIP even launched an ad campaign on July 20, but it is far different from the devastating "Harry and Louise" ads of the early 1990s that helped sink President Clinton's efforts at reform. This time around, the industry's ads are supportive of reform proposals, and they don't mention the public plan option. That could be because, as Charles Boorady, health care analyst with Citi Investment Research, says: "The health insurers … have a difficult PR battle."

Not-so-healthy competition
Certainly there are plenty of statistics and studies that come out against the industry on the issue of competitiveness. Insurance companies complain about the AMA's methodology in its market-concentration studies, but the nonpartisan U.S. Government Accountability Office reached many of the same conclusions in a recent report. It found that, for small group coverage, the largest insurer in a state has on average 43 percent of the market, up from 33 percent in 2002. In nine states the largest carrier has more than 50 percent of the market. "There is obviously a need for more competition in this market," says Karen Davis, president of the nonprofit Commonwealth Fund, which does research on health care issues.

The industry itself doesn't see it that way. Insurers argue that, with some 1,300 companies in the business, it can be cutthroat. "It doesn't feel like the market is not competitive to us," says Bradley Fluegel, chief strategy officer for WellPoint, the nation's largest insurer.

The benefits of healthy competition, however, are hard to spot. Between 2000 and 2007, annual increases in premiums averaged around 9 percent, while health care spending increased only 6.7 percent. Over the past 10 years health insurance premiums have increased 120 percent, compared to cumulative inflation of 44 percent and cumulative wage growth of 29 percent over the same period, according to a Henry J. Kaiser Family Foundation survey.

Part of the problem, says Commonwealth's Davis, is that the insurers cannot use their market power to bring medical costs down, because they are facing off against hospitals with just as much power. A 2006 study found that 88 percent of the nation's large metropolitan markets were dominated by one or two major hospitals. "You've got a dominant insurer up against a dominant provider of health care in a lot of markets," says Davis. "That just doesn't work out well for lowering costs."